The Impact of Political Risk on FDI Exit Decisions

Ksenia Gonchar; Maria Greve

doi:10.1016/j.ecosys.2022.100975

The Impact of Political Risk on FDI Exit Decisions

Ksenia Gonchar
, Maria Greve^*

^*Corresponding author for this work

University of Groningen

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can protect a multinational subsidiary in a host country that is characterized by weak institutions and high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and applying the Cox proportional hazard model, we find significant effects from elevated host-country political risk when we compare the year of entry to the year of exit. MNCs are particularly sensitive to problems associated with law, order, and social conditions in Russia and the presence of the military in politics in the home country. Institutional similarity does not reduce the hazard of exits, and MNCs from high-risk countries exit less when home-country risk increases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit, though sanctions interact with host-country risks, making them more severe. Being large and being part of a greenfield project help subsidiaries to build resistance against host-country political risks. These findings provide empirical evidence that support our conclusions regarding foreign direct investment volatility in countries with high risk.

Original language	English
Article number	100975
Number of pages	23
Journal	Economic Systems
Volume	46
Issue number	2
DOIs	https://doi.org/10.1016/j.ecosys.2022.100975
Publication status	Published - Jun 2022
Externally published	Yes

Bibliographical note

Funding Information:
The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support

Funding Information:
The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support

Publisher Copyright:
© 2022

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 10 Reduced Inequalities

Keywords

Russia
exit
foreign subsidiary
multinational company (MNC)
political risk
survival
transition economy

Access to Document

10.1016/j.ecosys.2022.100975

Cite this

@article{cfd123c6fbc440cbb3032f7a3e3bc5a9,

title = "The Impact of Political Risk on FDI Exit Decisions",

abstract = "Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can protect a multinational subsidiary in a host country that is characterized by weak institutions and high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and applying the Cox proportional hazard model, we find significant effects from elevated host-country political risk when we compare the year of entry to the year of exit. MNCs are particularly sensitive to problems associated with law, order, and social conditions in Russia and the presence of the military in politics in the home country. Institutional similarity does not reduce the hazard of exits, and MNCs from high-risk countries exit less when home-country risk increases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit, though sanctions interact with host-country risks, making them more severe. Being large and being part of a greenfield project help subsidiaries to build resistance against host-country political risks. These findings provide empirical evidence that support our conclusions regarding foreign direct investment volatility in countries with high risk.",

keywords = "Russia, exit, foreign subsidiary, multinational company (MNC), political risk, survival, transition economy",

author = "Ksenia Gonchar and Maria Greve",

note = "Funding Information: The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support Funding Information: The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support Publisher Copyright: {\textcopyright} 2022",

year = "2022",

month = jun,

doi = "10.1016/j.ecosys.2022.100975",

language = "English",

volume = "46",

journal = "Economic Systems",

issn = "0939-3625",

publisher = "Elsevier BV",

number = "2",

}

TY - JOUR

T1 - The Impact of Political Risk on FDI Exit Decisions

AU - Gonchar, Ksenia

AU - Greve, Maria

N1 - Funding Information: The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support Funding Information: The authors thank the anonymous reviewers, who generously shared their ideas and made this publication possible. They are particularly grateful for the valuable suggestion on how to improve our measurement of institutional risks — the issue most open to debate in this strand of literature. Special thanks are due to our colleague, Dr. Philipp Marek, who provided encouraging support and motivating guidance at the initial stage of the research. The work also benefited from helpful suggestions and comments by Kseniia Gatskova, Joanna Tyrowicz, and other participants in the seventh annual conference of the Leibniz Institute for East and Southeast European Studies, Regensburg, in 2019. The authors thank the Basic Research Program of HSE University for financial support Publisher Copyright: © 2022

PY - 2022/6

Y1 - 2022/6

N2 - Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can protect a multinational subsidiary in a host country that is characterized by weak institutions and high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and applying the Cox proportional hazard model, we find significant effects from elevated host-country political risk when we compare the year of entry to the year of exit. MNCs are particularly sensitive to problems associated with law, order, and social conditions in Russia and the presence of the military in politics in the home country. Institutional similarity does not reduce the hazard of exits, and MNCs from high-risk countries exit less when home-country risk increases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit, though sanctions interact with host-country risks, making them more severe. Being large and being part of a greenfield project help subsidiaries to build resistance against host-country political risks. These findings provide empirical evidence that support our conclusions regarding foreign direct investment volatility in countries with high risk.

AB - Do political risks drive exit decisions by multinational companies (MNC)? What mechanisms can protect a multinational subsidiary in a host country that is characterized by weak institutions and high political risks? Using multinational plant-level data for Russia in the period 2000-2016 and applying the Cox proportional hazard model, we find significant effects from elevated host-country political risk when we compare the year of entry to the year of exit. MNCs are particularly sensitive to problems associated with law, order, and social conditions in Russia and the presence of the military in politics in the home country. Institutional similarity does not reduce the hazard of exits, and MNCs from high-risk countries exit less when home-country risk increases. Subsidiaries from countries that have imposed sanctions on Russia are less likely to exit, though sanctions interact with host-country risks, making them more severe. Being large and being part of a greenfield project help subsidiaries to build resistance against host-country political risks. These findings provide empirical evidence that support our conclusions regarding foreign direct investment volatility in countries with high risk.

KW - Russia

KW - exit

KW - foreign subsidiary

KW - multinational company (MNC)

KW - political risk

KW - survival

KW - transition economy

UR - https://www.scopus.com/pages/publications/85128183006

U2 - 10.1016/j.ecosys.2022.100975

DO - 10.1016/j.ecosys.2022.100975

M3 - Article

SN - 0939-3625

VL - 46

JO - Economic Systems

JF - Economic Systems

IS - 2

M1 - 100975

ER -

The Impact of Political Risk on FDI Exit Decisions

Abstract

Bibliographical note

UN SDGs

Keywords

Access to Document

Other files and links

Fingerprint

Cite this